Home Depot warns over housing dip

Home Depot said weakening in the US housing market had come “faster and deeper” than expected and warned that the slowdown would continue next year.

Bob Nardelli, chief executive, said softening in the housing market had caused “significant” deterioration in home improvement sales, with conditions likely to worsen further.

“I would say we haven’t, within the home improvement part of this business, seen the bottom yet and I do not see anything that says it’s going to get significantly better in 2007,” he told investors.

The comments came as America’s second-largest retailer announced a 3 per cent drop in third-quarter net profits and lowered its full-year earnings guidance.

Mr Nardelli said a slump in new home construction had reduced sales to builders and tradesmen, while stagnating house prices were deterring consumers from investing in “big ticket” items such as kitchens and carpets.

The downturn is greatest in parts of the country that experienced the strongest housing growth over recent years, such as California, Florida and the north-east, he said.

Comparable store sales – the best measure of performance without the impact of new store openings – fell 5.1 per cent during the quarter.

Mr Nardelli said slowdown in the broader US economy was also depressing sales but weakness in the housing market was “by far the biggest contributor”.

Net profits were $1.49bn, or 73 cents a share, missing analysts’ consensus forecast of 75 cents a share. Merrill Lynch said the results were “disappointing” but “should not surprise”.

The gloomy outlook threatens to increase pressure on Mr Nardelli, who has faced criticism from some investors this year for accepting hefty pay increases while the company’s share price has sagged.

Mr Nardelli seized more direct responsibility for the struggling retail business last month, when he removed a layer of senior management that had previously distanced him from operations.

He vowed to press ahead with the company’s plan to invest an additional $350m in the second half of this year to improve customer service and freshen its stores.

By investing during the downturn, Mr Nardelli said Home Depot would “emerge even stronger when the housing cycle rebounds”.

Declining US retail sales were offset by growth in Mexico and Canada and a doubling in the size of HD Supply, the company’s wholesale division, helping lift total revenues by 11.3 per cent to $23.1bn.

HD Supply, which provides construction and maintenance materials to commercial customers, accounts for about 15 per cent of revenues following a series of large acquisitions.

Diversification into wholesale supplies and overseas markets is designed to reduce Home Depot’s dependence on the domestic DIY market, which was slowing even before the downturn in housing. The company is also planning to enter China.

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